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Labor Productivity Declines the Most Since 1981 as Labor Costs Soar 8.3%

Productivity fell 5.0% in the third quarter but unit labor costs rose 8.3%.
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Labor Productivity 2021-Q3

The cost of labor is soaring even though output per hour worked is decreasing according to the BLS Productivity and Costs report for the third quarter of 2021.

Productivity Highlights 

  • Nonfarm business sector labor productivity decreased 5.0 percent in the third quarter of 2021 as output increased 1.7 percent and hours worked increased 7.0 percent. 
  • This is the lowest rate of quarterly productivity growth since the second quarter of 1981, when the measure decreased 5.1 percent. (All quarterly percent changes in this release are seasonally adjusted annual rates.)
  • From the third quarter of 2020 to the third quarter of 2021, nonfarm business sector labor productivity decreased 0.5 percent. 
  • The four-quarter rate is the lowest rate since the third quarter of 2011, when the measure also declined 0.5 percent.

Labor Cost Highlights 

  • Unit labor costs in the nonfarm business sector increased at an annual rate of 8.3 percent in the third quarter of 2021, reflecting a 2.9-percent increase in hourly compensation and a 5.0-percent decrease in productivity. 
  • Unit labor costs increased 4.8 percent over the last four quarters. 

Unit labor costs are the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in productivity tend to reduce them.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked by all persons, including employees, proprietors, and unpaid family workers. The third quarter of 2021 is the fifth consecutive quarter with increases in both output and hours worked, following historic declines in those measures in the second quarter of 2020. 

The output index is now 1.8 percent above the level seen in the fourth quarter of 2019, the last quarter not affected by the COVID-19 pandemic, while the hours worked index remains 1.0 percent below its fourth quarter 2019 level.

Manufacturing Productivity

  •  Manufacturing sector labor productivity decreased 1.0 percent in the third quarter of 2021, as output increased 5.7 percent and hours worked increased 6.7 percent. 
  • In the durable manufacturing sector, productivity increased 1.4 percent, with a 9.9-percent increase in output and an 8.4-percent increase in hours worked.
  • Nondurable manufacturing sector productivity decreased 2.6 percent, as output (+1.3 percent) grew slower than hours worked (+4.0 percent). 
  • Total manufacturing sector productivity increased 2.4 percent from the same quarter a year ago. 

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 Manufacturing Labor Costs

  • Unit labor costs in the total manufacturing sector increased 2.9 percent in the third quarter of 2021, reflecting a 1.9-percent increase in hourly compensation and a 1.0-percent decrease in productivity.
  •  Manufacturing unit labor costs increased 1.9 percent from the same quarter a year ago.

Manufacturing vs Service Sector Productivity

Manufacturing productivity has been hampered by numerous supply chain issues especially crippling any devices that need computer chips. 

Yet, manufacturing productivity only fell 1.0% vs 5.0% overall. 

That means service sector costs vs output is soaring out of sight.

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